There is a storm coming!
I spent the last few days in Switzerland, visiting family and friends as well as networking with old colleagues from work. I am leaving Switzerland with a very distinct feeling in the pitt of my stomach. There is a storm coming! We are very close to a significant economic shift that will particularly affect the funding climate of small technology based startups. Time predictions are always hard. I can not tell you if it will take another 2 months or another 18, but the writing on the wall is fairly visible by now. The possibility of a drastic reduction of the funding market is now very real.
My prediction is based on two pillars. The macro-economic circumstances in the economic and financial world of Europe and the U.S. as well as the over-saturation of startups in the technology sector.
On the micro-economic level I am particularly concerned about the over-saturation of startups, the overlap of ideas and therefore the hyper competition in too many niche markets. In countless discussions with professionals in the tech and finance world in Switzerland two things became crystal clear.
- Everybody who read halfway through Eric Ries “The lean startup” or 37 Signals “Rework”, thinks they can start a company.
- They actually find investors for it.
I am used to high funding rates from the Valley, but I did not expect this amount of risk taking from the fairly conservative Swiss. After closer evaluation it turns out that many run often with identical ideas, concepts, market analysis even site designs of existing companies. I can not tell you how many Groupon competitors exist and not one of them being cash flow profitable (using standardized accounting practices). Each and everyone justifying their valuation by the IPO/acquisition price of other competitors. Meanwhile nobody seems to realize that they all compete for the same market, are feeding each others growth by swapping users and bidding up their nearly insane valuations. Let’s get this straight. Consumer facing internet startups are a hit driven business. For every one that wins, 99 companies die. It is just not realistic to believe that every single startup set out to produce daily deals will either be acquired or a sustainable long term business. But that is exactly how the Swiss entrepreneurs feel. And let’s put this further into perspective. Switzerland is financially and politically one of the most conservative nations in Europe. Women could’t work or open a bank account without the explicit permission of their husbands until 1985. In some parts they could not even vote until 1990. Now if the Swiss are startup crazy, I can guarantee you that our larger neighbors Germany, France, Italy or the Brits far up North are too. Summarized you now have perceived market valuations of small companies that exceed by far real values not just in the Valley or the US but all over Europe as well.
On the macro-economic level my prediction is fairly pessimistic. Greece will default, will exit the Euro, so will 1 or 2 other countries. The Euro in its current shape will no longer exist after 2015. Greece as well as all other exiting countries will get their own currency back, will likely face a period of hyper-inflation, great uncertainty and lower spending by consumers and dramatically reduced investments by companies. This will have a ripple effect through the financial world on to Europe and the US. I also predict that the US will face rising inflation and interest rates with similar effects, particularly a negative effect on the nationwide still very vulnerable housing market. 3 factors here will have a negative impact on the funding environment of startups.
- Low consumer spending and business investments will have a ripple effect through all industry branches. Ad prices in all shapes and forms from PPC, PPL to PPA will drop. Large companies as well as startups that depend on add revenue will see a revenue drop and accordingly adjust their forecasts.
- High inflation rates increase cost and reduce the runway of startups
- With high inflation will come with high interest rates which will further increase the opportunity costs for large pension funds and institutional investors. Why invest into a venture fund when you can make equivalent returns at the bond market at significantly lower risks.
Market corrections are natural and occur cyclical. This one is no exception. For Silicon Valley in particular the effects will be significantly smaller than the burst of the dot-com bubble. I do consider a consolidation of the funding market in Silicon Vally for tech startups by 30 - 40% as healthy and realistic.
Startup life is a trade-off
Just 2 months ago I joined Sahil and Bryan to build Gumroad. At that time I had literally zero Ruby/Rails experience and came from a Python/Java background. I was super excited to get started at Gumroad for multiple reasons. Of course I thought the idea and the product were kick ass and would change the world, but more than that on a personal level I really wanted to work on something that would push myself to the boundaries of what I am capable of. I didn’t wanted a regular job. I wanted a challenge. I wanted to learn a new language. I wanted to work in a high pressure environment where we ship code everyday, iterate over the product fast, are hell bent to make users happy and really change the world. And we did. And for a while it was good.
But what I missed to see were the consequences of my actions. And there is always a consequence. While I was pushing myself to the limit, burning the midnight oil coding, fixing bugs on our production system or commuting from S.F. to Palo Alto I pushed everything else aside. That included my health, my sanity, my wife and my daughter. Because at the end of the day everything you do is a trade off. There is always opportunity cost. The day has 24 hours and you choose how to spend them. Being the 2nd engineer hired at a startup that enjoys growth like Gumroad does demand a lot and pushes everything else to the side.
2 months in it started to become very clear that it was not working out. I spent barely any time with my wife, saw my daughter only when she was sleeping and still felt that I needed more time to work. Learn Rails faster. Write more specs. Build features faster. Try out this Gem or or that Gem… you get the point. It was a lose-lose for both me and Gumroad and I realized that I bit off more than I can chew.
On a personal note: I don’t regret joining Gumroad in any way. Could I go back, I would do it all over again. It just became clear that this would not work in the long run. It was a crazy emotional roller-coaster but I am glad to have been part of it. I am super bullish on Gumroad and I truly believe in the democratization of e-commerce for electronic goods. Gumroad will change the world!
How to run a tech startup
Running a startup is tremendously hard. When I started out with my first company, I felt that though there was a huge amount of high level advice, such as “focus on building a great product” given to me, there was little tangible advice on how to manage the subtle nitty gritty details of day to day operation. While I failed with my own startup, I would like to pass on some of the learning’s I gathered, so you hopefully can avoid these pitfalls. For those of you familiar with YC, some of my advice overlaps with PG’s advice on how to run a startup
How to run a tech startup:
- Communicate firm, clear, concise (no long emails, no fluffy words or long speeches/meetings, just get to the point and start WORKING on it, rather then talking about it.)
- Have clear roles/responsibilities/expectations within your team and give people the freedom to choose how they make it happen. Example: If you have a UI guy on your team how codes the frontend it is not your job as a CEO to tell him what color the button is supposed to have. Let him decide but measure him by clearly communicated goals (front end conversion, conversion of page view to $, render time etc.). To collaborate not cooperate should be your goal. Have your team leads show their work of the last week for 20 minutes each. Then have the entire team give feedback to them. But remember, the decision on what to change is theirs.
- No meetings, but the daily standup meeting (each person gives a 1 minutes update on what they work on today, what they are stuck with and who they need help from)
- Everyone must help with marketing and distribution! Getting the word out about your new product or company is every bit as hard as building it. Have everyone in the company pitch in. Practice guerrilla marketing through small bloggers, social media, inexpensive ads, guest blogging etc. Avoid the expensive PPC campaigns.
- Work lean and test your hypothesis as early as possible (even if you do not have a complete product - you can test market demand by creating a slide show, a video, a blog post etc.). Avoid building stuff that is not necessary!
- Launch fast/often. If you decide to build a feature (you should say no to most features and only focus on the true hypothesis you are trying to prove), speed is key. Iterate fast! Speed comes from simplicity. Do not over-architect, do not worry about too many edge cases. Do not worry about scalability. You can worry about all these cases once you have proven that your product is desirable.
- Understand your users. Have a fanatical customer support. Email/call/meet/survey them to understand what they want. After asking 100 people you will get 110 opinions, but in this sea of opinions you will see a pattern form. The pattern will lead you to the 2 or 3 core value added propositions that the users want. Implement those and only those.
- Silicon Valley is binary. You are nobody until you are somebody! Fund raising is useless without traction/leverage. So avoid it until you have traction. Get Ramen profitable first.
- Prioritization is saying ‘no’. Have 1-2 goals max. Make what you measure. Plot a chart every day with your key metrics to stay on track.
- Spend little (be resourceful/frugal). You don’t need fancy lunches, a nice office or a launch party. Cut out everything. All you need is good equipment to code with and your EC2 instance to run it on.
- Embrace the uncomfortable. Starting a company is hard. Nothing gets handed to you. You have to fight for every user, convince every investor, hustle for every BD deal. Accept that these things are hard, and that you will get rejected 99% of the time. Do NOT loose perseverance over it.
- Deals fall through. Assume it’s not a deal until the money is in the bank. Do not get demoralized if stuff does not happen.
- Exercise (for better sleep and stress management)
Last but not least, good luck!
on “getting shit done”
Ever wondered how some people just seem to be accomplish an incredible amount of work within 24 hours? They are so dedicated, productive, efficient and on top of their game! It almost seems that nothing can stop them. And most of them seem to do it without being visually stressed, depressed or sleep deprived. In contrary, most of them have more energy and feel more vital than the rest of us.
For quite a while I wondered, how they do it. What’s the secret? The truth is: “there is no secret”! “Getting shit done” has more to do with brutally efficient time management than with anything else. Time management that will force your mind and body into a predicable schedule to perform at peak capacity. Here a few key components.
- quite work area with as little distraction as possible, if possible bring noise canceling head phones, turn off your private cell phone, do not read private emails, only read business emails every 2 hours, so you can focus on actual work, schedule all meetings in blocks (all in the morning).
- do one thing at the time. no multi tasking!
- use http://www.rescuetime.com to track how effective you are at work hours.
- be street smart
- work out daily for 30 minutes in morning to get the blood flowing. have 2 days during the week when you do long and intensive work outs. your daily work out needs to be something that you can do very quickly. go running, have a hometrainer, lift some free weights in your garage, do some pushups. It does not have to be fancy, it just needs to get your metabolism up and running.
- Time your sleep patterns. You need 90 -100 minutes a cycle and 3-5 cycles a night. Go to bed every night at the same time. Wake up at the same time. Use SleepCycle on your smart phone
- no sodas. You want no sugar, no corn starch in any drinks
- no coffee either, you want to drink water but nothing that elevates your alertness temporarily, because the usual crash after the elevation lasts significantly longer than the elevation itself.
- eat as little carbs as possible.
- eat small meals whenever possible. avoid the food coma.
- eat little to no lunch. A small protein bar is o.k. but certainly no burrito.
- choose your time wisely. don’t waste it by hanging out with people you do not care about or barely know. life is too short for it.
- make time for family, loved ones and close friends. everyone else is secondary.
- be brutally honest with yourself. do you really need to go to this event XZY that your friend from high school, that you have not seen for 1 year, invited you too? Probably not.
- network consciously. go only to events that you know people you want to meet attend. know their names, how they look like, for who they work etc. You want planned serendipity.
WHAT IS YOUR EARLIEST HUMAN MEMORY?
Yellow plush duck hanging above my crib when I was 2 years old
echo “Hello World”
I am Mike (@MichaelKlocker). I am a software engineer in Silicon Valley. I grew up in Switzerland on the country side (yes, lots of cows) and am now helping Sahil (@shl) to build Gumroad (@gumroad), an awesome startup in San Francisco. To call this transformation anything less than f%$@&!ng awesome would be an understatement.
So why this blog? Easy. For too long I have expressed my thoughts, lessons learned and experiences gathered with a small selective group of people (family and friends to a large degree). But the longer I lived here in the Valley the more I started to comprehend that learned lessons and acquired knowledge are not supposed to be locked up in one’s mind, they are supposed to be shared.
Sharing has 2 extremely positive effects.
A.) it lets other learn from your experiences in which you hopefully make the world a better place by preventing failure and increasing efficiency and…
B.) it allows you to get in touch with people similar to yourself that can help you on the next step of your journey.
If you enjoy what you read here, do me a favor and tweet/share my blog with others. If not, no hard feelings.